Fannie and Freddie: the art of muddling through

Hank Paulson's Sunday evening announcement on Fannie Mae and Freddie Mac (the two gigantic pseudo-private enterprises that own or guarantee about half of the country's mortgages, and whose shares investors have been dumping) was mostly a request to Congress for temporary permission to act "if needed". He wants the Treasury to be able to lend to them, and to provide them with new capital (by buying equity or some kind of preferred stock). Meanwhile, the Fed has announced that it will provide liquidity support if required.

Paulson hopes, of course, that he will not have to use the methods he is asking Congress to allow, and that merely requesting the option will be enough to calm the markets. We shall see. The problem with the Treasury's approach is that, even while asking for these powers, thus confirming that it cannot let the enterprises collapse, it insists that they must continue "in their current form". If the enterprises prove unable to finance themselves privately, then they cannot, by definition, continue in their current form. So on reflection I don't know whether the announcement is about the art of muddling through or the art of self-contradiction. Maybe both.

My Monday column for the FT discusses Fannie and Freddie at greater length.